The 30-share Sensex gained 306.55 points, or 0.85 percent, to touch an all-time high of 36,356.99, breaching its previous record of 36,268.19 (intra-day) reached on 24 January.
Key Indian equity indices on Monday provisionally closed at fresh highs as healthy buying in auto, IT and consumer durables stocks, coupled with positive global cues, kept investors' sentiment upbeat.
Brokers said investors took money off the table and adopted a cautious stance ahead of the Union Budget on February 1. The 30-share BSE Sensex was 164 points down at 36,119 while the broader NSE Nifty was 64 points down at 11,066 in opening trade.
The Nifty also retreated from its life highs, but managed to close above the crucial 11,000-mark.
"Markets corrected on Tuesday as selling pressure emerged in the morning session".
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"The upcoming US Fed policy and India budget will remain the near term catalyst", said Vinod Nair, Head of Research, Geojit Financial Services.
Provisional data with the exchanges showed that both foreign and domestic institutional investors turned net sellers and sold scrips worth Rs 105.56 crore and Rs 281.65 crore respectively.
The lift came from gains mostly in Maruti Suzuki, TCS, HDFC Ltd, Tata Steel, Bajaj Auto, Kotak Mahindra Bank, Hindustan Unilever, M&M, Coal India, Infosys, Hero MotoCorp, Sun Pharma, L&T, HDFC Bank and IndusInd Bank.
Reliance Communications soared 10.46 per cent after the company reported narrowing of consolidated loss to Rs 130 crore for the quarter ended December 2017. London's FTSE fell 0.42 per cent.
In the Asian region, Japan's Nikkei was up 0.50 percent, while Hong Kng's Hang Seng fell 0.24 percent in early deals.